Arizona Court of Appeals
Menghini v. Menghini
Menghini v. Menghini was an unpublished memorandum decision where the Arizona Court of Appeals vacated the portions of the family court’s divorce decree where it unequally divided equity in a property and ordered a party to reimburse his in-laws for payments they made to maintain his health insurance coverage after service of the divorce petition.
The parties were married in 2004 and both entered the marriage with “substantial” real estate holdings. The parties acquired additional real estate during the marriage and were gifted membership interests in multiple limited liability companies by Wife’s parents.
After an evidentiary hearing, the family court entered its divorce decree where it divided community property and debt obligations, calculated community lien interests against separate property, ordered Husband to repay Wife’s parents for payments they made after the date of service to maintain his health insurance benefits, declined to address the membership interests in the LLCs, and denied both parties’ requests for attorney’s fees.
Husband appealed several portions of the decree and Wife cross-appealed the denial of her request for attorney’s fees.
Unequal Division of Property
Husband contested the family court’s allocation of the equity in a property acquired during the marriage. The family court’s decree essentially awarded Wife half of the market value of the property without accounting for its mortgage balance.
Wife argued that family courts are not required to divide community equally. Indeed this is true. Arizona statute only requires family courts to divide property equitably or fairly, it specifically does not require equal division. However, the Arizona Supreme Court has interpreted the statute to require substantially equal division of community property absent “sound reason” for unequal division.
Here, the Court of Appeals found no indication in the court’s order or the trial record to support unequal division. To the contrary, it appeared that the amount allocated to Wife was actually mathematical error. The portion of the decree that addressed this property initially subtracted the mortgage balance from the value of the home before it subsequently changed course and applied a different market value. It appeared that the family court intended to divide the equity equally and inadvertently omitted the mortgage balance when it reconsidered the market value fo the property. The Court of Appeals vacated this portion of the decree and instructed the family court to recalculate Wife’s share of the equity.
Next, Husband argued that the family court miscalculated his equitable interests (also known as community liens) in two of Wife’s sole and separate properties. Husband contended that the family court improperly excluded $35,000 of entitlement fees paid from a community bank account and other community efforts that improved Wife’s separate property.
The Court of Appeals rejected the premise of Husband’s first argument — that the character of the bank account from which the funds were paid determined the character of the funds. It explained that separate property does not automatically become community property simply because it is deposited into a community bank account where it is mixed or commingled with community funds.
The critical question concerned the source of the funds. The parties presented conflicting evidence, including testimony from expert witnesses, to identify the source of the funds. Wife and her expert testified that the funds consisted of proceeds from the sale of separate property sold before the marriage.
The Court of Appeals concluded that reasonable evidence existed to support the family court’s findings that the funds used were separate property. It feels like we say this in every appeal summary, but the role of the Court of Appeals is not to re-weigh conflicting evidence or testimony. It broadly defers to trial courts to do that. As long as competent evidence exists to support a trial court’s finding, it usually will be affirmed.
Appreciation and Improvements
Husband also alleged the family court failed to consider appreciation of Wife’s separate property during the marriage and failed to credit the community for repairs and other expenses that benefitted Wife’s separate property.
When the community is entitled to an equitable lien against separate property, it is entitled to a proportionate share of any appreciation that occurred during the marriage. The opposite is true, as well. If a property subject to a community lien depreciates during the marriage, the community lien lien must be adjusted to account for its share of the marital depreciation.
In this case, the parties again presented conflicting evidence concerning the property’s market value. Wife’s expert testified that the property significantly depreciated due to severe damage to the property. Husband’s expert testified that the property gained considerable value based on the area comps.
Similarly, the parties disputed the community’s contributions to the mortgage, repairs, and various other expenses that Husband sought to include in the calculation of the community lien. Although the family court does have discretion to include improvements and other expenses incurred to benefit a spouse’s separate property when it calculates a community lien, it determined Wife’s expert witness to be more credible. The Court of Appeals found that the family court acted within its discretion when it used adopted her calculus.
Business Formed During Marriage
This portion of Husband’s appeal illustrates the nuance of community property law. During the marriage, Wife formed a corporation with two of her siblings to commercially lease land that was gifted to them by their grandmother prior to the marriage.
Husband maintained that this corporation was community property because it was formed during the marriage using community labor. Before trial, Wife filed a motion for partial summary judgment where she successfully argued that her interest in the business was separate property.
At trial, the parties presented extensive evidence concerning the value of the business and the extent of the community contributions. Husband claimed an interest in the entire 30-year commercial lease. Wife argued and the family court agreed that Husband’s interest in the rental income ended when the community terminated upon service of the petition for dissolution.
Husband appealed both the characterization of the business as Wife’s separate property and the denial of his alternative claim to a community lien against the business.
Under Arizona law, property takes its character as separate or community property at the time it is acquired. Property retains its character as separate or community throughout the marriage unless changed by agreement or operation of law. This applies to all property, including businesses. So ordinarily, a business formed during the marriage would be presumed to be community property.
The caveat here is that the business was formed during the marriage exclusively to manage separate property. Incorporation of a separate business or asset during the marriage does not convert separate property to community property. Because there was no evidence that Wife gifted her separate property to the marital community, the character of the property and the business formed to manage it remained separate.
Still, the community may maintain an interest in profits generated by separate property when they result from community efforts. Family courts are required to apportion such profits and distinguish from profits inherent to the separate property.
The Court of Appeals found that the family court did this in the decree when it determined that the community was already “repaid” for its contributions with the rental income Wife used toward community expenses. The Court of Appeals compared these rental proceeds, approximately $150,000 between 2012 and 2016, to Husband’s claim that he invested at least 720 hours of community labor into the company. Using that figure, the community was paid $192 per hour and the Court of Appeals agreed with the family court that this adequately compensated the community.
Repayment of Insurance Premiums
The family court ordered Husband to pay $4,479 to Wife’s parents for reimbursement of health insurance premiums they paid after the date of service. Husband argued that the family court lacked authority to do this and the Court of Appeals agreed. Though there were some technical questions about whether any repayment obligation existed, the Court of Appeals explained that family courts lack authority to issue a judgment for payment of a debt owed to a third party and vacated this portion of the decree.
The family court ordered Husband to pay Wife $15,603.74 to equalize the funds that existed in one of their joint financial accounts as of the date of service. After service, Husband withdrew approximately $40,000. Wife testified that when she noticed this, she withdrew the remaining $12,989.30 and sought half of the difference between the withdrawals.
Although Husband claimed that he used the funds to pay community expenses, the family court was not convinced and it ordered him to pay exactly half of the difference between his withdrawal and Wife’s withdrawal so that the account was equally divided. The Court of Appeals deferred to the family court’s decision based on ambiguities between Husband’s claim and the trial record.
During the marriage, Wife’s parents gifted the community membership interests in multiple LLCs subject to operating agreements that required the interests to be placed in trust for benefit of the parties’ children in the event of divorce.
At trial, Wife’s attorney argued that because the entities were not joined to the action, the family court lacked jurisdiction to address the interests. Husband argued the family court erred when the decree did not address the community membership in the LLCs. Because the membership assets were community property, the Court of Appeals agreed and remanded this issue back to family court to be resolved.
Both parties appealed the family court’s denial of their requests for attorney’s fees and costs pursuant to A.R.S. § 25-324. The Court of Appeals did not address the merits of either party’s arguments. Instead, it simply vacated the denials and instructed the family court to reconsider the claims after all of the other issues were resolved on remand.